But intense negotiations under American mediation continued Sunday night and Palestinians gave no sign that a walkout was imminent.

Shortly after the 10-month moratorium expired at midnight, Israeli Prime Minister Benjamin Netanyahu issued a statement saying he was prepared to continue efforts to resolve the settlement standoff in the coming days and calling on Palestinians to "continue the sincere, good talks we have just begun, with the purpose of achieving an historic peace agreement between our two peoples."

The expiration of the moratorium cleared the way for about 2,000 new housing units to break ground in the days and weeks ahead on land occupied by Israel since the 1967 Middle East War.

Jewish settler groups, which have been prevented from building new homes since November 2009, vowed to move quickly on construction in case Netanyahu agrees to new restrictions. He has indicated in recent days that he might cap the number of new units as a concession to Palestinians.

Palestinian Authority President Mahmoud Abbas, who arrived Sunday in Paris to meet with French officials, repeated his call for Israel to extend a full moratorium and his negotiating teams has rejected Israel's compromise offers so far.

Abbas said Palestinians would not decide their next move until after an Oct. 4 Arab League meeting in Cairo, which could give both sides one more week to resolve the matter.

The U.S., which opposes settlement construction and has called on Israel to extend the moratorium, expressed hope that peace talks would not collapse.

Calling the latest round of talks an "unparalleled opportunity," senior White House advisor David Axelrod said on ABC's "This Week": "They're having serious discussions. They ought to keep on having those discussions, and we are very eager to see that happen."

State Department spokesman Philip J. Crowley said in a statement Sunday evening: "Our policy on settlement construction has not changed. We remain in close touch with both parties and will be meeting with them again in the coming days."

George J. Mitchell, the Obama administration's Mideast peace envoy, and Jeffrey Feltman, assistant secretary of State for Near Eastern affairs, conferred with Palestinian negotiator Saeb Erekat in the afternoon. Secretary of State Hillary Rodham Clinton spoke Sunday with Netanyahu.

The fight over West Bank settlements has long been a key sticking point in the Israeli-Palestinian conflict, though it has never brought the peace process to the brink of a standstill.

Israel has pledged previously to stop expanding settlements, but since the 1993 Oslo peace accords, the settler population in the West Bank has tripled to about 300,000. Most of the international community deems the settlements illegal.

Palestinians say it was a mistake not to demand a settlement freeze earlier, noting that as negotiations dragged on for years, settlements ate up land and resources they want for a future state. Negotiating for statehood while settlements expand is "a serious contradiction in terms," Arab League chief Amr Moussa told reporters over the weekend.

Israelis, on the other hand, accuse Palestinians of wasting the last 10 months of Israel's self-imposed moratorium by refusing face-to-face negotiations until this month. Now, Netanyahu is insisting that the settlement question be dealt with during negotiations, not as a precondition.

Earlier Sunday, Netanyahu attempted to defuse growing tensions by calling on settler groups to "show restraint and responsibility" as the moratorium expired. But settler activist organizations and conservative lawmakers held a series of rallies in West Bank locations, celebrating the impending end of the moratorium.

In the settlement of Kiryat Netafim, dozens watched a symbolic groundbreaking for a new kindergarten.

"The 10-month discrimination against the Jewish people in Judea and Samaria is finished," said Likud Party lawmaker Danny Danon, using an Israeli term for the West Bank. He added that the moratorium had relegated settlers to "second-class citizens."

Later in the nearby Revava settlement, hundreds gathered in a carnival-like setting with balloons and ice cream.

But Benny Katzover, head of the Samaria Settlers Committee, warned the crowd to be vigilant to prevent new restrictions from being imposed.

"I am afraid we must prepare for a struggle," he said. "There is talk of a compromise."

The fact that the settlement spat blew up into a crisis that is threatening to torpedo peace talks raised doubts about whether Netanyahu and Abbas are truly ready to reach an agreement.